Friday, January 15, 2016

Zee Entertainment: Higher taxes drag profit

After eight successive quarters of profit growth, Zee Entertainment in the December 2015 quarter (Q3) posted a 10.5% year-on-year (y-o-y) dip in net profit. Tax cost at Rs 165 crore, up 45% y-o-y, dragged Zee's earnings.

While guiding overall tax rate at 34% going forward, Mihir Modi, chief financial officer of Zee, says cost was higher in the quarter under review due to higher domestic income and easing of minimum alternate tax benefit seen in the September quarter.

With Zee not meeting the Street's expectation, its stock fell 3.5% on Friday. Nevertheless, analysts say Zee's performance in the December 2015 quarter does not raise an alarm as profit decline was mainly due to tax outflow, while its business fundamentals are still intact.

Revenues of Zee jumped 17% y-o-y, while operating profits, too, rose 22% y-o-y, and operating margins jumped 100 basis points (27%). These also indicate a sharp growth in Zee's mainstay revenue namely advertisement, which analysts believe is much ahead of competition.

For Zee, since costs are higher than revenues in the sports segment, cancellation of India-Pakistan cricket series to be held in December 2015 also helped margins.

While advertisement revenues (accounting for 59% of total income) grew 27%, y-o-y, subscription revenue (33% of total income), too, posted 17% y-o-y growth in December 2015 quarter.

However, income from other sales and services (syndication sales and film distribution) remain on a weak foot declining 25% y-o-y in the third quarter of FY16. Analysts feel other income in the quarter under review is not strictly comparable to the year-ago quarter as the December 2014 quarter was at a higher base driven by sport events.

The December 2015 quarter once again saw Zee post loss of Rs 15 crore in its sports business, after briefly becoming profitable in the second quarter of FY16. The company retains its pessimistic guidance for this segment.

However, Zee shrunk its operating (mainly content) costs as a percentage of revenues from 66% in the third quarter of FY15 to 60% in the December quarter of FY16.

Operating cost increased by only 9% in the third quarter of FY16, yet another factor which analysts believe is a positive for Zee as it has managed to keep a check on cost during a festive season quarter.

On the whole, though the market hasn't been benign on Zee for missing the earnings target, analysts remain bullish as the company maintains its market leadership and profitable track-record in the media space.

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